Tuesday, November 27, 2012

Big Ten Expansion: The Legal Angle

As Mr. Gillette recently reported (in a Gillette-Torvik Non-Exclusive Breaking News Item of the Day), Maryland and Rutgers will be joining the Big Ten athletic conference.

One of the footnotes in this news is that the members of the ACC (Maryland's current affiliation) recently voted to impose a $50 million "exit fee" on institutions that leave the conference. (Until September, the fee was a mere $20 million.) In the press conference announcing the decision to go over to the Big Ten, Maryland's president was somewhat dismissive of this requirement, implying that the fee would get whittled down in negotiations: "As far as that exact amount of that sum, that is something that we will discuss in private with the ACC."

Well, the ACC has taken things very public by suing Maryland in North Carolina state court to recover the $50 million. I haven't reviewed the contract between Maryland and the ACC, but I presume the exit fee is styled as "liquidated damages" for the harm caused by Maryland's breach. Such provisions are generally permitted under contract law so long as they don't amount to a penalty. I expect that Maryland will argue that the fee is an excessive penalty that is not meant to recompense the ACC for any damages but rather to penalize it for jumping ship.

Maryland's best argument, it seems to me, is the recent and sudden increase in the fee from $20 to $50 million. Is there any basis to believe that the reasonable approximation of damages suddenly increased 150%? It seems much more reasonable to believe that the conference realized that $20 million wasn't enough to make it uneconomical for members to leave for greener pastures. In other words, it became evident that the fee wasn't punitive enough to prevent breach. Seems like a penalty.

A Gillette-Torvik Prediction™:  Maryland and the ACC will soon settle this suit for an undisclosed sum, "in private." That undisclosed sum will be around $25 million.

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